Equity 101 Basics

Dear Learners,

Welcome to our course, and thank you for your dedication and enthusiasm to learn about all things equity. We hope you will find the material engaging and insightful.

After working through our guide (which can be completed in under 60 minutes), you'll have the chance to put your knowledge to the test and earn an official Ledgy certification in Equity Fundamentals.

Here’s how it works:

1. Study the course: Dive into our Equity Fundamentals Course, which covers all employee aspects of equity in-depth. Take your time to absorb the knowledge and concepts presented. Feel free to use Ledgy along your journey through the guide. By integrating the Ledgy app into your study routine, you'll gain a deeper understanding of financial concepts and how they apply to your specific equity plan.
2. Test your knowledge: Once you feel confident in your understanding of the material, you can take the test to check your understanding of all the concepts you have learned. Please note that the upcoming test will exclusively cover Part I and Part II of the course - Equity 101 Basic and Equity Pillars. You have an unlimited amount of attempts for the test.
3. Certification badge: Upon successfully passing the test, you will receive an official certification badge. This badge is a symbol of your achievement and can be prominently displayed on your LinkedIn profile.

Taking full advantage of your employee benefits is a wise financial strategy. It not only enhances your financial security but also contributes to your overall job satisfaction and well-being. We encourage you to take 60 minutes of your day for your own personal and professional growth, and as a way to share your achievements with your professional network.

We look forward to delving deeper into the subject matter with you!

Best regards,

Ledgy Team

By accessing and using this course and its content, you acknowledge that it is intended for general guidance and educational purposes only. It is not legal, financial, or tax advice. The actual tax treatment of equity plans can vary based on the specific details of the equity plan, individual tax status, and changes in tax laws. We strongly recommend consulting with a qualified tax or legal advisor, to obtain personalised advice before you take any action with respect to your equity. Keep in mind that tax laws are subject to change, and it is important to stay informed about any updates that may impact your equity taxation.

For employees

• Equity is a reward for the work people do to help grow a business over time. More and more companies offer equity alongside salary as a core component of compensation.
• Employees receive the opportunity to become part-owners of the company they work for. This sense of ownership can foster a deeper commitment to the company's success and a stronger alignment of interests.
• Equity can give you a better connection to the company and a deeper commitment to your company’s success and your contribution towards it. Equity highlights a direct link between your efforts and your company's financial success.
• Equity is a potential path to financial wealth and social mobility. Even if you were hesitant about investing your personal funds into a stock before - equity makes every employee a part-owner. For many, it’s a level-up both socially and financially. With equity, financial wealth is not a privilege, but an opportunity, independent of socio-economic background.

For employers

• Equity is a way to attract people who want to have a voice in their company: they ask questions, want to make decisions, and want to improve processes. People who want to sit at the table. People who challenge leadership. Entrepreneurial people. Employees with stock options often have a strong incentive to perform well and contribute to the company's growth, as they directly benefit from its success.
• Equity is a prerequisite to meet a growing level of expectation from candidates to have equity offered on top of a salary package and benefits. Stock options can be an attractive recruitment tool, helping to attract top talent who are looking for opportunities for ownership and financial participation.
• Equity is a way to reward employees for hard work in a company, for taking risks, for adapting to changes and shifts in strategy, for wearing different hats, and for working with ambiguity. Employee equity plans are typically structured to reward employees for their long-term commitment to the company.

Useful materials to deepen your knowledge:

The State of Equity & Ownership Report 2023

Employee Equity Plans: A Case for Democratising Ownership of Your Company

Ledgy Customer Stories

You have joined a company that offers equity ownership to its employees - congratulations!

A grant happens when your company awards you shares or share options. Grants normally happen at regular intervals, which will be defined in your share option agreement. The most common ways to receive employee stock options are Initial and Refresher grants.

Initial grant:

• Definition: An initial grant refers to the first allocation of stock options or equity awards that you receive upon joining a company or as part of your initial compensation package.
• Purpose: The initial grant is designed to attract and incentivise talented individuals to join the company. It serves as a starting point for employees to participate in the company's future success.
• Typical timing: Employees often receive their initial grant when they are hired or shortly after. The size of the grant may vary based on factors such as the employee's role, seniority, and the company's compensation practices.

The most common way companies determine the size of your share option grant is to apply a percentage multiplier to the salary for every role/level in the company, to determine the value of the equity package they will receive.

• Imagine a company decides that for junior software engineers, the salary multiple due to be granted in equity is 0.4x.
• This means a junior engineer on €60k will receive a share option package worth €24k (40% of their base salary).
• For junior salespeople, that multiple might be 0.2x, so a salesperson’s grant would be €12k (20% of the base salary).

Refresher grant:

• Definition: A refresher grant, also known as a "refresh grant" or "annual grant," is a new allocation of stock options or equity awards given to employees after their initial grant has vested or as part of an ongoing retention and incentive strategy.
• Purpose: Refresher grants are intended to motivate employees to stay with the company, continue contributing to its success, and align their interests with the company's long-term goals. They serve as a way to refresh or extend the employee's equity participation.
• Typical timing: Refresher grants are typically awarded annually or at regular intervals as part of the company's compensation and retention strategy. The size of the refresher grant may depend on various factors, including the employee's promotion, performance and contribution to the company.

When you join your new company, carefully review your employment contract, offer letter, or any equity-related documents provided. Here are the key components of a stock option grant:

1. Number of options: The grant should specify the number of stock options granted to the employee. This number can vary based on factors such as the employee's position, performance, and the company's policies.
2. Type of equity plan: If you have been granted stock options, you'll need to exercise them to become an equity holder. This typically involves purchasing the company's stock at the predetermined exercise price. For Restricted Stock Units (RSUs) or other equity awards, you become an equity holder straight away when the award vests, without exercising. Upon vesting, the company will typically transfer the shares to you, and you'll become a legal shareholder.
3. Exercise price: The grant establishes the exercise price at which the employee can purchase the company's stock when they choose to exercise their options. This price is often set at the current market value of the stock or a discount thereof.
4. Vesting period: The grant outlines the vesting schedule, which details when the employee becomes eligible to exercise the options. Vesting typically occurs over a specific period, incentivising the employee to remain with the company.
5. Expiration date: Each grant has an expiration date or maturity date, which is the deadline by which the employee must exercise the options. Once the options expire, they become worthless.
6. Terms and conditions: The grant may include additional terms and conditions, such as performance-based criteria that must be met for the options to vest, special restrictions on the shares acquired through exercise and termination clauses in case you leave the company.
7. Tax implications: The grant documentation may also provide information on the tax implications of exercising the options, including any applicable tax withholding or reporting requirements.
8. Understand voting rights (if applicable): Depending on the type of equity you hold, you may have voting rights in the company. Review the equity agreement to understand your voting rights and how to exercise them.

Overwhelming? No worries - you’ll find more information about equity plan types, vesting, exercising and more in the rest of this guide. They are also covered in Part II - Key Pillars of Equity. Finish up Part I by finding out what it means to be a shareholder, and understanding how your equity might compare to someone else’s in another company.

Once your allocated stock options or RSUs have vested (and you have exercised your stock options in the case of option plans), you become a shareholder in your company, which means that you have acquired shares and an ownership stake in the company.

As a shareholder, you have certain rights and responsibilities, and your ownership represents a financial interest in the company. Here's what it means to be a shareholder in a private company:

Financial stake: As a shareholder, you own a portion of the company. The number of shares you own determines the percentage of ownership you have. For example, if you own 100 shares out of 10,000 total shares, you have a 1% ownership stake in the company. Minority shareholders have the potential to benefit financially from the company's success. If the company grows and becomes more valuable, the value of their ownership stake increases, allowing them to profit from the appreciation in the company's worth.

Ownership interest: Your ownership stake carries a financial value. If the company generates profits or is sold, you may be entitled to a portion of those profits based on your ownership percentage. This can be distributed as dividends or capital gains. Not all private companies pay dividends, as they may reinvest profits for growth.

Participation in growth: Even as a minority shareholder, you can participate in the company's growth and success. Your financial interests are aligned with the company's performance, giving you a sense of ownership and engagement in its development.

Voting rights: Depending on the company's governance structure, minority shareholders may have limited voting rights. While they may not control major decisions, they can still have a say in certain matters, such as electing directors or approving specific actions. Minority shareholders with less than 3-5% stake in the company are often represented by one of the founders or a leadership team for voting.

Exit strategy: In the event of a sale, merger, or acquisition of the company, even minority shareholders may receive compensation or benefits as part of the transaction, depending on the terms and agreements in place.

Networking opportunities: Being a shareholder in a private company can provide networking opportunities within the industry or among other investors, potentially leading to valuable connections and collaborations.

Learning experience: Owning shares in a private company can be an educational experience, offering insights into the inner workings of businesses, corporate governance, and the challenges and opportunities faced by the company.

Access to information: Shareholders typically have the right to access certain company information, such as financial statements, annual reports, and updates on the company's performance which, if you are using Ledgy, you can see directly in the Updates section.

Transparency: Companies with an employee equity program tend to be more transparent. You have an opportunity to ask questions on company strategy, and be actively involved in your company’s development and success.

Diversification: Owning shares in a private company can add diversification to an individual's investment portfolio. It provides an opportunity to spread risk across different asset classes, especially if the shareholder's other investments are in different industries or asset types.